Aecon Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 11 speakers on the call.

Operator

thank you for standing by. Welcome to the Q2 2024 Aecon Group Inc. Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Borgatti. Please go ahead.

Speaker 1

Thank you, Kevin. Good morning, everyone, and thanks for participating in our Q2 results conference call. This is Adam Borgatti speaking, Senior Vice President of Corporate Development and Investor Relations. Joining me are Jean Louis Servranckx, CEO Jerome Julier, Executive Vice President and CFO and Alistair MacCallum, Senior Vice President, Finance. Our earnings announcement was released yesterday evening and we posted a slide presentation on the Investing section of our website, which

Speaker 2

we will refer to during

Speaker 1

the call. Following our comments, we will be glad to take questions from analysts and we ask that analysts keep to one question and a follow-up before getting back into the queue. As noted on Slide 2 of the presentation, listeners are reminded that the information we're sharing with you today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.

Speaker 1

And with that, I'll hand the call over to Jerome.

Speaker 2

Thanks, Adam, and good morning, everyone. I'll touch briefly on the results, review our quarterly segment, address Aecon's financial position and then discuss our legacy projects before turning the call over to Jean Louis. You will see that there have been quite a few developments, so we've added additional information to help clarify the underlying results. Detailed reporting tables are available on Slide 16 and 17. Turning to Slide 3, on a reported basis, revenue for the 3 months ended June 2024 of $854,000,000 was $313,000,000 or 27% lower compared to the same period in 2023.

Speaker 2

Adjusted EBITDA of negative 153,000,000 dollars compared to $17,000,000 last year and operating loss of $166,000,000 in the quarter compared to an operating profit of $56,000,000 last year. Adjusted EBITDA and operating profit in the 2nd quarter were negatively impacted by the previously disclosed $127,000,000 non recurring charge related to the achievement of a global settlement for the Coastal GasLink pipeline project and the additional aggregate charge of $110,000,000 related to the 3 remaining legacy projects. Excluding the impacts from the legacy projects and the divestitures, which we will describe as adjusted, Revenue for the 3 months ended June 30, 2024, of $975,000,000 compared to $978,000,000 in the same period in 2023. Adjusted EBITDA was $78,000,000 compared to $93,000,000 last year and operating profit was $46,000,000 compared to $64,000,000 last year. Diluted loss per share in the quarter of $1.99 compared to diluted earnings per share of $0.38 in the same period last year.

Speaker 2

Our reported backlog of $6,200,000,000 at the end of the quarter compared to backlog of $6,200,000,000 at the end of December 31, 2023 and $6,900,000,000 at the end of the Q2 of 2023. New contract awards of $766,000,000 were booked in the quarter compared to $2,000,000,000 in the prior period. Now looking at results by segment, turning to Slide 4. Construction revenue of $851,000,000 in the second quarter was $288,000,000 or 25 percent lower than the same period last year. Revenue was lower in industrial operations, primarily due to decreased activity on mainline pipeline work following the achievement of substantial completion on the Coastal GasLink pipeline project in the Q3 of 2023, which offset a higher volume of wastewater treatment facilities work.

Speaker 2

Revenue was lower in the urban transportation solutions from a lower volume of LRT work in Ontario and as a result of the sale of Aecon Transportation East in the Q2 of 2023 and from a lower volume of major project work following completion of a large hydroelectric project in 2023. Partially offsetting these decreases was higher revenue in nuclear operations driven by an increased volume of refurbishment work and utility operations from a higher volume of electrical transmission and battery energy storage system work, partially offset by lower volumes in telecommunications and gas distribution. On an as adjusted basis, construction revenue was $973,000,000 flat to last year. New contract awards of $763,000,000 in the Q2 of 2024 compared to $2,000,000,000 in the same period last year. New awards in the Q2 of 2023 were bolstered by significant additions in nuclear operations.

Speaker 2

Backlog at the end of the Q2 of $6,100,000,000 compared to $6,800,000,000 at the end of the Q2 of 2023, which included roughly $200,000,000 of pipeline related backlog at this time. Turning now to Slide 5, adjusted EBITDA of negative 173,000,000 dollars compared to negative $4,000,000 last year. As previously noted, the decrease was largely driven by negative gross profit on the 4 legacy projects of $237,000,000 in the Q2 of 2024 compared to negative gross profit of $81,000,000 on these projects in the same period last year. Adjusted EBITDA in the 2nd quarter on an as adjusted basis was $64,000,000 compared to $78,000,000 last year with the variance being driven by lower gross profit transportation solutions from real electrification work, increases in corporate costs and partially offset by improvement performance in our nuclear operations. Turning now to Slide 6, revenue for the Q2 was $2,000,000 compared to $27,000,000 in the same period last year.

Speaker 2

The decrease in revenue was largely driven by the sale of 49.9 percent interest in Skyport to the Bermuda Airport concessionaire and commencement of the equity method of accounting for Aecon's retained 50.1 percent interest in Skyport. Adjusted EBITDA in the Concessions segment of $30,000,000 compared to $28,000,000 last year. Operating profit related to the Skyport asset was higher in the 2nd quarter driven by one time recoveries of $5,900,000 in 2024 and incremental gain on sale of $5,900,000 reported in 2024 related to additional proceeds earned in the 2023 partial sale of Skyport. On an as adjusted basis, operating profit in the Concession segment in the Q2 was $5,000,000 compared to $9,000,000 last year, reflecting lower development fees and higher costs associated with pursuits on energy transition endeavors. On Slide 7, we've brought together the information to exclude the impact of the legacy projects and divestitures to provide insight and field and volume performance of the business.

Speaker 2

Adjusted revenue for the trailing 12 month period ended June 30, 2024 was $3,800,000,000 compared to $3,700,000,000 for the same period last year. Adjusted EBITDA including the previously noted adjustments was $344,000,000 in the $1,000,000,000,000 12 month period compared to $343,000,000 in the same period last year. For the construction segment on an adjusted basis, the EBITDA was $305,000,000 for the trailing 12 month period representing an 8% margin. Turning to Slide 8. At the end of the Q2, Aecon held cash and cash equivalents of $131,000,000 excluding cash and joint operations.

Speaker 2

In addition, at June 30, 2024, Aecon had committed revolving credit facilities of 850,000,000 dollars of which $98,000,000 was drawn and $4,000,000 was utilized for letters of credit. Netting the cash position against our drawn revolver results in a net cash position of $33,000,000 at the end of the quarter prior to the inclusion of other debt items noted below. Aecon has no debt or working capital credits maturities until 2027 except equipment loans and leases in the normal course. In addition, Aecon's Board of Directors has authorized a normal course issuer bid or NCIB to purchase for cancellation up to 5% of the issued and outstanding common shares or approximately 3,100,000 common shares of Aecon, subject to the approval of the TSX. Aecon intends to file a notice of intention with the TSX in this regard and if accepted, NCIB shortly thereafter.

Speaker 2

Turning to Slide 9, I'll now provide an update on our legacy projects. On June 28, SA Energy Group in which Aecon is a 50% general partner and Coastal Gasoline Pipeline LP reached an amicable and mutually agreeable global settlement to resolve their dispute fully and finally over the construction of Section 34 of the Coastal GasLink Pipeline Project in BC. The settlement agreement is not an admission of liability by either party and the parties have mutually leased their respective claims in the arbitration, thereby avoiding the expense, burden and uncertainty associated with the arbitration. The terms of the settlement agreement are expected to result in no cash impacts to Aecon. As noted previously from an accounting perspective, Aecon recognized a non recurring charge of $127,000,000 in the Q2 of 2024 related to the settlements.

Speaker 2

The Coastal GasLink settlement allows Aecon to close a chapter, one of the most technically and financially challenging projects in its history. And we want to thank our team for delivering the project safely and with incredible resiliency through to completion. Progress continues on the 2 LRT projects in Ontario, including signaling and train control systems testing and advances in driver training for the operator. Physical work is nearly complete with most station and structured occupancy permits received. Full vehicle testing is also ongoing across the projects.

Speaker 2

However, forecasted substantial completion dates have been delayed due to setbacks in meeting necessary testing, commissioning and additional training and coordination requirements with the operator. As seen on the cover of the presentation, the deck on the Gordie Howe International Bridge between Windsor and Detroit is now connected. This is a significant accomplishment, creating the longest cable state bridge span in North America. Work is progressing on the main bridge and on the Michigan interchange, as well as on the 2 international port of entry facilities and their core systems. However, additional costs have been incurred related to the bridge and Michigan interchange structures and finishes as well as other areas such as the finishes and the mechanical and electrical systems of the port of entry facilities.

Speaker 2

As a result of these impacts, Aecon recognized an aggregate charge of $110,000,000 in the quarter from the remaining 3 legacy projects reflecting our current estimates on the cost of completion for these remaining projects. AECOM believes our estimates to be accurate as of today and the majority of the risks for the remaining three legacy projects are largely behind us. However, additional risks exist if assumptions, estimates and circumstances change until the projects are substantially complete. To that end, we are providing a risk analysis that reflects negative changes to our assumptions, which could potentially impact our cost to complete on these projects. Based on the information currently available, Aecon believes the potential for future additional financial risks to Aecon, if any, through to completion of the remaining 3 legacy projects should not exceed $125,000,000 to the end of 2025.

Speaker 2

We remain focused on driving the remaining legacy projects to completion while pursuing fair and reasonable settlement agreements with the respective clients in each case. Of the remaining 3 projects, one is currently expected to be substantially complete by the end of 2024, another in early 2025 and the final project by the end of the Q3 of 2025. At June 30, 2024, the remaining backlog to be worked off on the legacy projects was $269,000,000 compared to backlog of $420,000,000 at December 31, 2023 and $699,000,000 at June 30, 2023. At this pruning, I'll turn the call over to Jean Louis to address our business performance and outlook.

Speaker 3

Thank you, Jerome. Turning to Slide 10. Aecom's goal is to build a resilient company through a balanced and diversified work portfolio, while enhancing critical execution capabilities and project selection to play to our strengths. We continue to leverage our self perform capabilities and 1 Acorn approach to maximize value for clients through improved cost certainty and schedule, while offering a broad range of services from development, engineering, investment and construction to longer term operations and maintenance to cover the full infrastructure value chain. While we pursue and deliver the majority of our work in established markets, we are embracing new opportunities to grow in areas linked to decarbonization and the energy transition and in U.

Speaker 3

S. And international markets. Our acquisition of Extreme PowerLine, which we will discuss further, aligns with this approach. These opportunities are intended over the long term to diversify Aecon's geographic presence, provide further growth opportunities and deliver more consistent earnings through economic cycles. Turning to Slide 11, demand for Aecon Services across Canada continues to be strong.

Speaker 3

With backlog of €6,200,000,000 at June 30, 2024, recurring revenue programs continuing to see robust demand and a strong bid pipeline, Aecon believes it is positioned to achieve further revenue growth over the next few years and is focused on achieving improved profitability and margin predictability. We are pursuing a balanced portfolio of work delivered through both fixed and non fixed price contracting models with the goal of reducing fixed price work to balance risk with acceptable return. Trailing 12 months recurring revenue of €1,100,000,000 was comparable to the prior period and up 38% versus 2 years ago. Contribution from the GO Expansion on corridor works and Scarborough Subway Extension projects during the respective development phases increased in the quarter, which offset a lower volume of gas distribution and telecommunications work in utilities operations and impact from the sale of ATE last year. Adjusting for the impact of the sale of ATE and the 49.9% interest in Skyport, recurring revenue increased 9% on a like for like basis over the trailing period last year.

Speaker 3

Turning now to Slide 12. Development phase work is underway in 5 consortiums, in which Aecon is a participant to deliver the Go Expansion on Corridor Works project, the Scarborough Subway Extension project, the Darlington New Nuclear Project, the Contrekar Terminal Expansion Project and the U. S. Virgin Islands Airport Redevelopment Project. These projects are being delivered using collaborative progressive design build models, and each project is expected to move into the construction phase in 2025.

Speaker 3

The Go expansion project also includes an operations and maintenance component over a 23 year term, commencing January 1, 2025. As a reminder, none of the anticipated work from these 5 progressive design build projects is yet reflected in backlog, but could in aggregate increase our backlog in 2025 to approximately double the level of our current backlog. Turning to Slide 13. With strong demand, growing recurring revenue programs and diverse backlog in hand, Aecon is focused on achieving solid execution on its projects and selectively adding to backlog through a disciplined bidding approach that supports long term margin improvement in the construction segment. In the Concession segment, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy as well as private sector development expertise and investment to support aging infrastructure, mobility, connectivity and population growth.

Speaker 3

Revenue in 2024 will be impacted by the 3 strategic transactions completed in 2023, the substantial completion of several large projects in 2023, the 4 legacy projects and the 5 major projects currently in the development phase by consortiums in which Aecon is a participant being delivered using the progressive design build or alliance models, which are expected to move into the construction phase in 2025. The completion and satisfactory resolution of claims on the remaining 3 legacy projects remains a critical focus, while the remainder of the business continues to perform as expected, supported by the strong level of backlog and the strong demand environment for Aecon Services, including recurring revenue programs. Finally, turning to Slide 14. On July 2, Aecon Utilities Group acquired a majority interest in Extreme PowerLine Construction, an electrical distribution utility contractor headquartered in Michigan for a base purchase price of approximately USD73 1,000,000 with the potential for additional contingent profits. Extreme is a full service power line constructor with approximately 300 employees, specializing in overhead distribution line repair, maintenance, expansion and emergency restoration services throughout the Eastern United States for over 20 utility clients.

Speaker 3

The acquisition of Extreme creates opportunities to harness our collective utility infrastructure expertise and drive continued growth in priority markets. Extreme experienced team and strong client relationships are aligned with our business, and we, along with our strategic partner Oaktree, are pleased to welcome the Extreme team to help advance our continued growth across North America with a focus on the energy transition. As a final comment, I would like to thank our team members for their enduring efforts and ongoing focus on safety and consistent execution. I would like to call specific attention to our Kingstown port team in St. Vincent and the Grenadines, while leading a fundraising effort to support the recovery from Hurricane Barry.

Speaker 3

Thank you. We will now turn the call over to analysts for questions.

Speaker 4

Thank you.

Operator

Our first question comes from Jacob Bout with CIBC. Your line is open.

Speaker 2

Good morning.

Speaker 5

First question is on margins. It seemed a bit soft in the core construction group. Maybe just talk through what happened in the quarter. And I know last quarter, I think on a TTM basis, they were around 9.5%. Is that what you would consider normal course on an annualized basis?

Speaker 2

Hey, Jacob, it's Jerome here. Good question. So from a margin perspective in the quarter on the construction side of the business on that as adjusted basis, we delivered 6.6%. I think we need to remind ourselves versus last year where we delivered 8%, we had some benefits last year with regards to certain projects on the UTS division and just general strong revenue and productivity. Q2 is not like a high production quarter for us, right?

Speaker 2

We generally tend to back end weight the production through the Q3 and Q4 period. So I'd say the overall quarter nothing exceptional. There's certainly room for ongoing focus and improvement on the margin profile and execution. With regards to the overall business, what I just noticed again just focusing on the construction side, margin profile on an LTM basis was 8%. We view that as a strong performance reflecting overall consistent execution from the team.

Speaker 2

It's also really given the nature of the work programs that we're engaged with 1 quarter in isolation doesn't really fully tell the story. I think the right way to look at it is over time and I think that those 8% delivery is a room for improvement on that potentially for sure it's a focus for the team, but that's still a pretty productive level for a construction business. If we take it at the aggregate consolidated basis, 9% margin, there is a benefit that we accrued there on the accounting protocols for the concessions business where revenues effectively been derecognized on the Bermuda asset. And so we're effectively just picking up an EBITDA contribution. And so from that perspective, the 9.5% that was in the quarter last year on an adjusted basis would be a very strong result.

Speaker 2

But if you again look on an LTM basis, I think what we produced was a pretty good indicator.

Speaker 5

Okay. Maybe just a follow-up there. As you move to a more collaborative project model, maybe just talk through some of the embedded margins in those 6 projects that you've got coming up?

Speaker 3

Yes. I will check this one, Jacob. What is important and very interesting for us in the progressive design build model is the predictability of the results and the fact that we co develop the project with our client during the 1st 18 or 24 months. This is extremely important. So we don't give special guidance on special project, but this model is, I would say, much more favorable to contractors and evidently will increase our margin predictability.

Speaker 3

And this being said, to come back to the first part of your question, I mean, we are, of course, tracking the performance of our peers and competitors. I mean, 8% EBITDA on construction activity for the last 12 trailing months, if we get out the legacy project impact, it's quite a good performance. So we are rather optimistic for the future, of course.

Speaker 2

Thank you.

Operator

One moment for our next question. Our next question comes from Yuri Lynk with Canaccord Genuity. Your line is open.

Speaker 4

Hey, good morning. Thanks for taking my question.

Speaker 3

Good morning, Yuri.

Speaker 2

Good morning.

Speaker 4

So Q1 was a clean quarter. 8 weeks later, you take the $110,000,000 charge on the 3 LSTKs. So something changed quickly there with relation to costs. So how are you now comfortable putting out the $125,000,000 looking out over 18 months? Just what's the difference between that number and the 110 that was booked?

Speaker 4

And what's changed now to allow you to feel confident putting a number like that out there?

Speaker 2

Yes. Hey Yuri, it's Jerome speaking. Thanks for the question. So with regards to our current estimates on the cost of completion, which is the $110,000,000 impact that we booked in the quarter, That reflects management's best estimate to completion of the projects as of today. So when we talk about these projects and reforecast in general, there tends to be in some instances step function changes when schedule slippages are identified and cemented.

Speaker 2

And that was certainly the case that resulted in the 110. I would note that the 110 is based on the cost to complete estimates that we have. We're confident in those estimates and those reflect the scheduling that we had noted which is end of 2024, early 2025 and Q3 2025. So what's candidly changed between now and where this potential risk figure that we've provided if any through the completion is effectively centered around a couple of things. And what gives us the confidence is number 1, the mutually agreed and kind of final and full settlement of the CGL arbitration and dispute provides us with additional confidence by taking out one of the larger risk elements from the overall legacy project cohort.

Speaker 2

And then number 2, the completion on the projects is now much more in sight than it's been at any period prior. And what we've done is we've analyzed a variety of factors and what could lead to the 125 would be additional cost creep on the construction and development and then it was scheduled. That being said, given the status that we have on these projects today, we remain confident the 110 is appropriate. That being said, we just wanted to provide stakeholders with a bit of a perspective around what financial risks could look like if status schedule costs etcetera started creeping to the right and where we see appropriate risk bounds in association with that.

Speaker 4

Okay. And just as a follow-up, in terms of potential timing of realizing some of that $125,000,000 I mean, I would assume Q3 is going to be a clean quarter. But fair to say it would be appropriate to kind of think about maybe a quarter or a third of that getting recognized in the Q4? Like how do we think about the timing and the likelihood?

Speaker 2

Yes. Good question, Yuri. So without confirming or denying any of your assumptions, the way that we would see the potential financial additional financial risks materialize, if any, would likely manifest themselves in association with any potential schedule slippage on the delivery of the projects and attainment of substantial completion. And to that end, as we've noted, end of 'twenty four, early 'twenty five is likely the area where we'll have better information in association with this. And so if we're thinking about where these costs could materialize and these are just estimates at these points, so we're not going to give ourselves any finality on this because these are potential impacts if any.

Speaker 2

But this idea of that a portion manifesting itself in the current fiscal year is possible and that the waiting that you noted is not a terrible way to think about it because it associates pretty much with the 2024, 2025, 2025 and probably not a bad way to think about it.

Speaker 4

Okay. Thanks for taking my questions.

Speaker 2

Yes. Thanks Yuri.

Operator

One moment for our next question. Our next question comes from Chris Murray with ATB Capital Markets. Your line is open.

Speaker 6

Yes. Thanks guys. Just maybe turning back a little bit, looking at the Concessions business for a second. If we sort of back out the 5 $900,000 of one time recoveries, you're kind of running, call it, maybe plus or minus $20,000,000

Speaker 3

in EBITDA.

Speaker 6

Just trying to think about how we should be thinking about the Concessions business as a contribution on a go forward basis. Are you and I guess part of this is, how are you seeing the stability of the airport right now? And is there anything else to be thinking about in terms of some of the other contracts that are underway changing that earnings profile over the next, call it, 18 to 24 months?

Speaker 2

Good questions. I'll break it down in a couple of ways. So with regards to the operating profit of the concessions business in the quarter, we delivered $5,000,000 versus roughly $9,000,000 in the same quarter last year. Again, I've switched you from EBITDA to operating profit on an as adjusted basis, Chris. The main difference there is largely related to reduction in development fees and increased pursuit costs.

Speaker 2

When projects are in active construction, there is a development fee or a fee that's collected by the Conceptions Group and that can be additive to their earnings profile. And then with regards to the Bermuda Airport, maybe I'll turn it over to Adam just to provide a little bit of context on the operating factors there.

Speaker 1

Sure. Thanks, Jerome. So Bermuda continues to recover from its pre pandemic traffic levels slowly. We're up to about the low 80% in terms of passenger volume that was experienced prior to COVID-nineteen impacts. But the key factor there is obviously the ability to have your revenues and associated costs for airlines and passengers, etcetera, increase at a level that exceeds your passenger volume.

Speaker 1

So from a financial perspective, the airport is operating well and in line with where we were before this despite lower passenger volume to kind of stay around this level or small increases over time as hotel and other accommodation capacity increases in the market. To Jerome's point, we've got where concessions are now as these major projects come off and the concessionaire moves into its O and M phases for the various LRTs, etcetera, you will see some of that concessions EBITDA reduced as the no longer carrying the construction into operations such as the United Battery Storage Project and is successful moving forward on the USVI opportunity. So a few puts and takes there in terms of timing, but that's basically the dynamics that's driving concessions now.

Speaker 6

Okay. I'll leave it there. Maybe turning back to the $125,000,000 So I guess under the accounting rules, you booked the $110,000,000 because that's your kind of agreed to booked up number. But thinking about the 125, I mean outside of some schedule slippage and probably some recognition of that schedule slippage as you actually get closer to those target completion dates. Is there anything else I guess what I'm trying to figure out is how to risk that $125,000,000 materializing and how you're thinking about either certain events, material costs, labor, anything like that that could be driving kind of that 125 number?

Speaker 3

Yes. I mean, Chris,

Speaker 2

that's a good question. We're going to be limited in the amount of insight and perspective that we can really drill into for a variety of reasons. What I'll say is the 125 was developed through a very detailed analysis of multiple variables, outcomes across the full spectrum of activities involved with these projects, whether it's schedule, cost, claims, systems integration, training, etcetera, right? So I'd say the complexity that underlies that figure is quite deep. And so it's we're not going to be able to point to any specific particular factor and we're going to be pretty much sticking to the fact that there's potential for additional financial risks, if any, being up to the $125,000,000 So that's we grew the whole year.

Speaker 2

Here is the kind of standard deviation associated with that, we're just going to give the 1 up two point estimate.

Speaker 6

Okay. So maybe a different way to frame it. So like the 125 really represents the worst case scenario in your best estimation?

Speaker 2

It represents the potential for future additional risks to Aecon through the completion of the remaining construction, right? As of today, based on what we know and the information we have available to us, right? Again, just to reinforce the point, where we stand today is 110 and that's it. And then if those assumptions change based on what we see today, that's the additional future additional risk that could come into us. All right.

Speaker 2

Thanks. I'll leave it there.

Operator

One moment for our next question. Our next question comes from Benoit Poirier with Desjardins Capital Markets. Your line is open.

Speaker 7

Yes. Thank you very much and good morning everyone. Just on the nuclear side, could you maybe provide more color about the bidding opportunities right now and kind of the opportunity to scale up the work outside Canada?

Speaker 3

Yes, Benoit. Thank you for the question. Aecon is ideally positioned for the future of nuclear. On one side, we have all the refurbishment programs, I mean, in Ontario. The execution goes quite well.

Speaker 3

We are finalizing the 2 large reactor in Darlington. We have now acquired most of the units at Bruce. Only the 3 last steam generator are still in the discussion, but we have preferred arrangements on this one. Pickering now in terms of major rehabilitation is under negotiation with OPG for the 4 next units. It fits perfectly with the end of Darlington in terms of load of work for our people and our means of production.

Speaker 3

So this rehabilitation is quite strong. SMR, I mean, in Darlington, the development phase is perfectly on track. We are all working hard in our alliance with GI Tachi and Atkins Realis. I remind you that there is room here not only for 1, but for 3 additional. As I've told you a few months ago, SMI is very interesting for us because it is a door to a lot of potential activities within Canada in other province or outside Canada.

Speaker 3

I mean, you have probably noticed that we signed a cooperation agreement in Poland a few weeks ago. And that's just the beginning and we are very happy about it. In addition to this, we are ramping up in United States. You remember that in 2018, we made the acquisition of a small specialized nuclear welding company called WOX. That's ramping up quite well.

Speaker 3

I mean, we are now working on some refurbishment program, for example, for Dominion, job of around $200,000,000 But also on Savannah River, I mean, for the federal authorities, all this goes into the right direction. We have opened an office in Charlotte a few months ago. So we are ideally positioned, extremely happy on the way we are learning, we are capitalizing on our experience and the position that we have in this nuclear field.

Speaker 7

That's great color. And when we look, Jerome, at the free cash flow generation and working cap there, there's been a great reversal in Q2. Could you provide maybe some granularity or greater detail about how we should expect the working cap and free cash flow to play out in the back half and for the full year?

Speaker 8

Benoit, it's Alistair. So, as you know, typically our business ramps up in terms of revenue in Q3 and Q4. So, from a working cap perspective, would expect to build in Q3 as we typically have and then Q4 tends to have strong release of working capital. So, we'd expect that trend to continue. And I think as you said, we've had a good release so far of working capital.

Speaker 8

We expect to have positive capital at the end of the year. As you know, our working capital can be lumpy depending on payments. And so, I think, but strong expectation that we'll be positive from a working capital perspective at the end of the year.

Speaker 2

Okay. And then just to learn on it, also just from a cash flow perspective, just we made the acquisition of PowerLine, so that needs to be factored in. And then as well, the NCIB needs to be factored in as well.

Speaker 7

Okay. That's great. And with respect to the acquisition of Extreme PowerLine, how should we be thinking about the integration and whether your willingness presence in the Utility segment? Yes. I think presence in the utility segment?

Speaker 3

Okay. I will check on this one, Benoit. We're extremely happy with the acquisition of Extreme. It's perfectly within the targets. It's perfectly within our core competency.

Speaker 3

It's in Michigan, which means quite close from us. It's a very professional company with more than 300 employees in United States. The fact to have your own employees professionally trained and loyal to the company is extremely important. You remember what I said last time. I mean, our strategy is to try to make acquisition in the mid single digit in terms of multiplier for the EBITDA and integrate them within our Aecon Utilities Group, which have been valued between 9 times 10 times multipliers.

Speaker 3

This is what we have been doing. It's a very strong company. So of course, we have to integrate this company within Aecon. We are rather optimistic. I mean, we had very thorough due diligence.

Speaker 3

We know that the G and A is the same. We know that the teams can work together. What is important are the very strong relation with DTE, but also the agility of this company to work in addition to their core business on all the emergency response happening within the United States. And this is quite important. I mean, it's part of the business that is more and more important.

Speaker 3

I mean, you probably noticed in our introduction that we spoke about Saint Vincent and the hurricane, I mean, Beryl in Caribbean. So it's not unusual to have a Category 5 hurricane in June in Caribbean, but we were ready for this. Impacts have been minor, just a few weeks, less than €2,000,000 of losses, no fatalities, no wounded people within our team. I mean, it's there will be quite a large trend of investment in all those emergency response due to climate change. Extreme is very well positioned for this.

Speaker 3

So we are happy about it. We're going to integrate it, and we will progress forward. We are rather ambitious, although prudent on our growth in United States and international.

Speaker 7

That's great color. Thank you, Jean Louis.

Operator

One moment for our next question. Our next question comes from Ian Gillies with Stifel. Your line is open. Good morning, everyone.

Speaker 2

Good morning.

Speaker 9

You've quantified the risk for the remaining three projects, obviously, through the end of 'twenty five. Could you maybe qualitatively address what sort of risks or opportunities you may see on those projects for recovery, maybe in 2026, just as you get post project completion, there's true ups, etcetera?

Speaker 3

Yes. I can speak a little about this and maybe, Jerome, if you want to add something. I mean, these are extremely complex projects with a lot of interfaces, with a lot of stakeholders. And we consider, I mean, at least on the 2 LRTs that there has been major modification in the condition of executions of our contract due to these interferences. So we will have a strong focus on recovering what we think is fair due to this the consequences of those interfaces.

Speaker 3

And I would say we will do it with a lot of trends because we just consider that this is what has to be done in line with the project agreement that we have been signing quite a number of years ago. It means that we will fight up to the end so that our rights are recognized and that we just received fair and honorable compensation for the issue that we have been facing. And this is very important. So first of all, substantial completion, very important. I mean, as soon as possible, getting substantially completed on those job and going to the next phase, which is maintenance under our contract, but also recovering with a lot of energy any amounts of money that you are convinced are due to our companies.

Speaker 3

Jerome, do you want to add something?

Speaker 2

Yes. I think it was well articulated, Jean Louis. The Ian, just to your point, these are the circumstances that could take a notable amount of time to resolve and move through the various resolution methods. And so I think from our perspective qualitatively, it's only we said it well. And just from a timing standpoint, it's probably we're not forecasting any pluses or minuses, just to the extent that it's so far out at this point.

Speaker 2

But it's obviously a key focus for the team.

Speaker 9

Understood. As you look across your customers today and ongoing bid activity, are there any notable pockets of weakness that you're seeing on the private capital side? There's some stuff that seems to be coming up in the U. S, but in Canada, is there any cause for concern at this point?

Speaker 2

Look, one of the benefits of the diversified business profile is it allows us when there's a little bit of chop in the water, we can still navigate it pretty readily. One area that we did call out was just with regards to the utilities business. We have noticed maybe a little bit less robust dynamic in association with telecommunications and natural gas distribution. I think that's likely temporal, like it's something that we'll pass, but it's something that we don't the work will need to get done, but we just view it as probably just moving a little bit to the right. I don't know, Jon, if there's any other areas that you see strengths or weaknesses on the Canadian side?

Speaker 3

No. What we can see is that probably United States is more in advance than Canada on everything related with energy transition, all the subsidizing program and everything to make it happen quickly, especially, I mean, this is why Extreme was such an important acquisition, I mean, through the bipartisan act and the inflation reduction act. I mean, there's more than €65,000,000,000 already dedicated and ready to go just to modernize the nation in electrical infrastructure. So we're just seeing that United States is in advance, but Canada, I mean, is not in a standstill. So we are also rather optimistic on this.

Speaker 9

Perfect. I'll leave it there. Thank you very much.

Operator

Our next question comes from Sean Jack with Raymond James. Your line is open.

Speaker 10

Hey, good morning guys. Thanks for taking my question. Just a quick question on Extreme. Wondering if you could comment on how competitive that auction process was? And also wondering if you're seeing dynamics for auction processes getting a bit easier or harder since you began looking?

Speaker 1

Thanks, Joniano. Great question. This was a unique one for us. We actually really liked the firm as did Oaktree and its review of opportunities prior to our transaction in the fall of last year. So it's actually a nice one for us when we came together to more we are really trying to avoid big auctions, big headline numbers, those that would compete with lots of financial capital for platform investments.

Speaker 1

It's not what we need. It's not what we and our partner feel is the right approach for this business. And so we're going to be very prudent and judicious with our capital, seek out, as Jean Louis described, fair value companies, ones that will integrate well culturally with a safety focused culture and what we described as our land and expand strategy, which is find great businesses that do a few things very well for our great clients and then apply what we can also bring, which is additional capabilities, more work into Aecon and the ability to take on larger and more complex projects to our balance sheet and credit capacity. So very successful outcome. We had lots of time and the right approach on due diligence for this one and intend to do the same going forward on a very measured approach and lots more in the funnel right now that we think is in our wheelhouse.

Speaker 10

Okay, perfect. And last one, just for Exchange specifically, wondering if there's any puts and takes on seasonality that you guys would want to call out or does it pretty well match Aecon's construction business?

Speaker 1

Yes, it's got similar levels to our seasonality. Again, lots of its work is in the north of the U. S. Adjacent to our border. And so you'd have the same weather impacts on outdoor work that we would have in our utilities.

Speaker 1

So aside from, as Jean Louis described, storm response and emergency services that would move elsewhere throughout the U. S, potentially expanding off peak times, it mostly follows our seasonal pattern. Okay, perfect. Appreciate it. Thanks guys.

Speaker 1

Thanks, John.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Adam for any closing remarks.

Speaker 1

Great. Thanks, Kevin, and thanks, everyone, for your participation today. As always, feel free to reach out to us with further questions and comments. We welcome the feedback and wish you a good rest of the day and we'll speak with you on the next call.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Key Takeaways

  • Reported Q2 revenue of CA$854 million was down 27% year-over-year, with a CA$166 million operating loss driven by a CA$127 million non-recurring Coastal GasLink settlement charge and CA$110 million of costs on three legacy projects; on an adjusted basis, Q2 revenue was CA$975 million (flat) and adjusted EBITDA was CA$78 million (versus CA$93 million last year).
  • Aecon recognized a CA$127 million charge for the amicable settlement of the Coastal GasLink dispute and a CA$110 million charge on the remaining three legacy projects, and management estimates potential additional risks up to CA$125 million through end-of-2025 if assumptions or schedules change.
  • Backlog stood at CA$6.2 billion at quarter end (flat from Dec 2023, down from CA$6.9 billion a year ago), with new Q2 awards of CA$766 million vs. CA$2 billion prior; trailing-12-month adjusted revenue was CA$3.8 billion and adjusted EBITDA was CA$344 million, reflecting an 8% construction segment margin.
  • Five major projects in the progressive design-build development phase (GO Expansion, Scarborough Subway Extension, Darlington new nuclear, Contrekar Terminal and U.S. Virgin Islands Airport) are expected to move into construction in 2025 and could nearly double current backlog.
  • In July Aecon acquired a majority interest in Extreme PowerLine Construction for US$731 million to strengthen its U.S. utility footprint, tapping into energy-transition and emergency restoration opportunities with over 300 specialized employees.
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Earnings Conference Call
Aecon Group Q2 2024
00:00 / 00:00